Federal authorities recently conducted a raid on a multi-level marketing company, shutting the operation down and alleging the company was running a multi-level pyramid scheme. It isn’t the first company like it to get busted, nor will it likely be the last.
Fortune Hi-Tech Marketing raided for alleged multi-level pyramid scheme
Many people over the years have accused multi-level marketing businesses of running pyramid schemes. Some certainly have been. The most recent MLM, as the business model is sometimes called, firms to be accused of running a pyramid scheme is Fortune Hi-Tech Marketing and federal and state agents recently raided the company’s headquarters in Kentucky, seizing the business, according to the Washington Post.
The company is accused of running an illegal pyramid scheme, allegedly structuring compensation so that recruiting new sales personnel, who have to buy starter kits and product in order to sell it, is more lucrative than commissions on selling products.
That’s the line the government draws; if an MLM pays people mostly for getting other people involved and buying product, rather than selling to customers, that’s a multi-level pyramid scheme. Only the top tier of the company makes any money while everyone else goes broke, like a pyramid.
Few make much
Very few earn much by working for Fortune Hi-Tech Marketing. According to USA Today, it’s alleged that 85 percent of payable commissions, bonuses, etc., are from recruiting others. The legal complaints against the company assert 90 percent of sales associates earn just $15 per year or less, but spend up to $1,500 on health and beauty products to sell.
During discovery in a 2010 lawsuit against the company, it was found that about 30 percent of sales associates receive no compensation whatsoever. Of those that do, 54 percent earned an average $93 per month though before costs. Of people who were earning money from Fortune Hi-Tech, 99 percent made less than $32,000 per year. The top 0.07 percent of the company, dubbed “Presidential ambassadors,” earned more than $1.2 million per year on average.
Company spokespeople vow they will have vindication. Initial announcements of a raid on a multi-level marketing firm on suspicion of being a multi-level pyramid scheme caused some shockwaves, according to the Wall Street Journal, as shares of publicly-traded MLM firms such as HerbaLife and Nu Skin dipped.
Many in the industry accused
Many people over the years have cried “J’Accuse!” over multi-level marketing, accusing a company committed fraud, was a multi-level pyramid scheme and so forth. Fortune Hi-Tech Marketing is just the latest.
Accusations have been leveled at HerbaLife, a Jezebel.com article blasts make-up company Mary Kay, jewelry companies Stella and Dot, Lia Sophia, Premier Designs Jewelry and…we’ll say “adult novelties” company Pure Romance. Many sales persons may have cause to certainly think so; a Federal Trade Commission study found 99 percent of MLM distributors, meaning sales people, lost money in the venture.
It’s a pretty big pie they aren’t getting a piece of. Multi-level martketing, according to The Economist, is a $30 billion per year industry in the United States. Worldwide, MLM companies gross $154 billion per year.
The Economist: http://www.economist.com/news/business/21569051-herbalife-shorted-bottom-line